Why, How and Under What Circumstances Do Firm Compete with Each Other on Price - Assignment Example

Why, how and under what circumstances do firm compete with each other on price? Outline theories and provide examples to illustrate your arguments. [Name] [Course Instructor] [Course Title] [Date] In their ideal world, every firm’s dream is to maximise profits and cut costs when planning out the opening of their company. Firms compete together to make a healthy rivalry between themselves and other similar firms so that they are able to match with pricing and innovation. Every firm’s goals are measured through revenue, profit and market share growth. Firms are always on their toes to find ways to have the upper hand on other rival companies. Every company has a wish to maximise their profit or even better, close down other firms for their own sake to be able to increase their market share. An example of a firm who have been successful with closing down another rival company is the Sports Direct Company, owned by Mike Ashley, who has his own controversial way of cutting prices to run a successful business. Price change can come from various reasons, with decisions made by firms during the course of their own business or firms even being forced into a decision due to related economic issues. There are many reasons that will indicate why, how and under what circumstances firms compete with each other on price. The two most common way firms’ compete with each other is by price competition and non-price competition. This involves competing with other firms by lowering and becoming the best priced compared to their rival firms’ products. By cutting prices, firms can further increase the amount of customers using their products in order to try boost their sales and market share (Anon., 2015). This can only be done with products that are price-elastic. An example of this can be, the Sports Direct Company who has been able to close down other sportswear shops by lowering down to outrageous prices due to the company buying cheap goods from Asia. The company will need to do their research in the market to be able to buy cheap products, so that they can still be able to make profit. Firms can also compete with other firms with a non-price competition strategy, as they can compete with just the product features and quality instead of the price. Innovation is a key in this section as firms can evolve to a better and more efficient way in product development. Product development in different retail outlets can also help the firm become more efficient, which can be done by promoting campaigns to let the consumers know about their recent arrival. This can include attractive advertisements in and around the store. Non-price competition is important for customers as they do not only compare prices with other companies but also the quality and the ease of purchasing the goods or service. Another common way to compete with other firms is by price and product quality which are advertised to interested consumers through promotional strategies. In perfect competition (same market), they compete over product quality and through their own unique promotional strategies. By doing this, the firm hope to attract more people to buy their products that would result in more revenue for the firm as customers will start to trust them. With that being said, the firms consider its top priority to be able to keep existing customers so they buy more products instead of just using the firm for the one-off product. In some major firms, they cut prices on certain products (price-elastic ones) in order to attract existing customers to generate an increase in sales revenues. An example could be that of a decrease in price for a certain customer who has been deemed as the trusted one given the amount of times they’ve purchased products from the firm, so the firm would like to give out gifts (discounts) or promotions to expand sales further as well as keeping the customer happy. Now I ask, why do firms compete when they can all have their own customers and be run in a rather stable way but who wants that? Every firm advertise themselves in hope to be the best at what they do, ahead of any other similar firm. By cutting prices and updating products, firms can expect to attract more consumers. This is all worked in order to increase their revenue to eventually get bigger than other firms, or even cut them straight off the market like Sports Direct have managed to do. In this unforgiving market where a firm does not increase its stakes to become bigger then it may not survive. The company image is also very important in order to compete in today’s market with competition for products as tough as ever (Tice, 2011). Enhancing the firm’s image further for the public so the customers can easily identify the image as the part of the company, is important. Customers identifying an image can only increase their trust naturally as they are familiar with the logo or identity of a trusted brand or company. By keeping a good image, the firm can expect to expand, leading to increased sales and market share whereas a poor image will always reduce sales with other rival companies seen as a better image. Market share is another major aspect for a firm to further expand ahead of their rivals. The market share of firm is a significant percentage of the full market value of sales. An example can be that of the sale of the google android phone which was once accounted for 33% of smartphones sold in the world. Organisations will aim to increase their market share to widely establish its product, and to withstand any future competition. In order to achieve product superiority, over rival companies for similar products, a firm will need to make sure that their product is clearly better than rival products by any new customer. This can be achieved by the help of marketing and letting people know how strong the product is in comparison to their rival products. A superior product will always give the company an advantage over other companies in order to help generate sales and expand the company market share further. Firms will need to show informative advertising everywhere in order to beat other rival firms. With the current trend in the present time being internet and television, they are used as the most predominant way the common population see products. The internet is a simple way for firms to demonstrate products overseas, in order to attract customers from different countries. Informative advertising gives interested viewers substantial information about a product to a costumer, which can only increase product credibility and generate a good reputation for the business. Persuasive advertising is another key aspect companies needs to follow in order to compete with their highest ranked rivals. This is designed to attract consumers to eventually create a pull-factor towards the firms’ own product instead of their rival company. This usually decreases the prices of rival products and is known as brand switching. Advertising involves the creation of consumer wants with the main objective being to create positive consumer perception about specific products. Creating a bond with the consumers that have a ‘want’ for that product will only encourage them to return in future, making them loyal towards the firm. By doing this, the market price will increase; however it will only attract consumers to always believe that this product is better than any other similar product in the market. Over-paying for advertising campaign can create an obstacle for the firm to face to start that product’s marketing by any competing firms. Any new firm will have the task to balance the funds available. As they will need to balance the amount spent on advertisement and product quality. These are the most important ingredients to make the firm dominant in that particular market and eventually reducing competition to make it their own market. Any advertising is the cost of production which can use abundant resources of the firm, unless they are able to use the right amount of money on products. If not, the profit will be majorly reduced despite strong advertisements. Product differentiation is also an important way for a company to be able to encourage customers to join them rather than their rivals. Product differentiation is the process of recognising and distinguishing a product or service compared with other similar goods in order to make it more attractive to a particular target market. This involves finding ways to differentiate the firm’s own products from the competitor’s. Some simple but powerful advertising can create customer loyalties. As customers will be loyal with their trusted company, then they would be encouraged to still purchase products even if the firm decide to increase their price. There would be a ludicrous amount of demand putting the firm in competition with a higher more superior firm and the firm would more likely lose because of economies to scale. So the firms will need to have some sort of interaction to be able to make smart, strategic decisions as every leading, dominant firm will never ignore any new rival entrants. Due to this strategic thinking by firms and the fact that new entrants cannot be ignored, production planning becomes dependant on the reaction of other firms. Price wars, every big firm can take price wars as an incentive to dominate the market in comparison to any new and immature firm. In the case of price reduction in the market, smaller firms will find it tough to compete with their superior’s leading them to eventually close down for going to a price war with a dominant firm. This result in all of the remaining bigger firms to fight it out for the remaining shares of those firms that couldn’t compete and have therefore get closed down. Over a course of time, consumers may not find this beneficial, as firms can then start acting like they have monopolies in the market, giving them the right to choose the price they deem as reasonable which can be higher than the initial price given. Consumers can benefit a lot from price wars as it can trigger a merry-go-round of a decrease in prices by firms competing with one another to gain a bigger market share, which will result in goods and services becoming cheaper for consumers. An example of a competitive firm with low prices is the Sports Direct Company. They have a tight control of suppliers and are very tight in terms of head office structure which allows Sport Direct to make a handsome profit, despite low prices and low margins. The owner, Mike Ashley has been very astute in making tough decisions and taking advantage of the market being cheap in the Far East to eventually close down companies such as JJB and All Sports to become a mature firm in the market with revenues continuing to rise since the launch of the company (Coughlin, 2015). Firms are able to cheat in the market by finding out their competitors’ price. They then cheat and undercut the price of another firm. Firms can take advantage of lowering the price as they will then be able to gain all market shares and can expect to generate huge profits over the other firms’ expense. Firms will need to be wary as although they can benefit financially from cheating, they will most certainly have another firm retaliate which could kick-start a trigger strategy with both firms. A trigger strategy is easily defined as, if a firm chooses to professionally communicate with a competitor indefinitely until one of the firms doesn’t comply with the agreement. If in any case, a firm doesn’t comply and chooses to cut its prices then it will gain profit for a short period, consequently, they will more likely be punished in future. Some firms may see this scenario as a chance for them to benefit from some added profit, as the payoff for cheating can be worth it. Firms will be encouraged to do it in order to gain complete market shares for that one short period which can result in huge profits, although for a short time. Consequently, firms will only find it sensible if discounting is at a high level or if a firm is able to foresee that the punishment isn’t strict and if the grim period may not linger too long. Joseph Bertrand was a French mathematician who came up with the creation of the Bertrand paradox which is still being used in current economic affairs. In a Bertrand oligopoly, each firm sets their own price, taking as a given price which is set by other firm, in order to maximize their profits (Pettinger, 2013). A residual demand is shown as a curve by an individual’s firm demand curve which is the part of the market demand that is not supplied by another firm in the market. Subsequently it is the market demand taking away the quantity supplied by other firms given their individual price. Assuming a market with a top firm is present and they are generating big profits yearly, you cannot assume that they are in the market alone. Some minor firms, who are looking to make their way up in the industry, would see this as a private operator who is trying to behave in a monopolistic manner. Meaning a creation of opportunities for other firms to grab a hold of as the any new firm can then come into the market leading to a decrease in price and obtaining the additional demand needed. Assuming a new firm was to change the price of the monopolists’ optimal price, by lowering at less than a monopoly price leading it to become less likely to be profitable in future. References Anon., 2015. Price Competition. [Online] Available at: https://www.boundless.com/marketing/textbooks/boundless-marketing-textbook/pricing-8/competitive-dynamics-and-pricing-58/price-competition-291-7302/ [Accessed 30 June 2015]. Coughlin, A., 2015. Competing on price? Ten steps to success. [Online] Available at: http://www.marketingdonut.co.uk/marketing/marketing-strategy/competing-on-price-ten-steps-to-success [Accessed 30 June 2015]. Pettinger, T., 2013. Bertrand Competition. [Online] Available at: http://www.economicshelp.org/blog/glossary/bertrand-competition/ [Accessed 30 June 2015]. Tice, C., 2011. Seven Ways to Avoid Competing On Price. [Online] Available at: http://www.entrepreneur.com/article/220406 [Accessed 30 June 2015]. Read More